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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-26146
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HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5930 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(619) 546-8877
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
--- ---
AS OF OCTOBER 31, 1997 THERE WERE 19,567,742 SHARES OF REGISTRANT'S COMMON
STOCK, $0.001 PAR VALUE, OUTSTANDING.
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INDEX LISTING
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<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet at September 30, 1997 (unaudited)
and December 31, 1996. 3
Consolidated Statement of Operations (unaudited) for the
three and nine month periods ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows (unaudited) for
the nine month periods ended September 30, 1997 and 1996 5
Notes To Consolidated Financial Statements (unaudited) 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
Item 5: OTHER INFORMATION 19
Item 6: EXHIBITS AND REPORT ON FORM 8-K 19
Signatures 20
</TABLE>
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PART I - FINANCIAL INFORMATION
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Item 1: FINANCIAL STATEMENTS
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,974 $ 7,517
Short-term investments 18,430 7,353
Accounts receivable, net 25,989 18,832
Current portion of deferred income taxes 6,668 6,400
Other current assets 3,302 2,505
-------- --------
Total current assets 58,363 42,607
Property and equipment, net 9,664 5,966
Deferred income taxes, less current portion 19,754 22,966
Other assets 2,624 3,305
Long-term investments 18,157 19,375
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$108,562 $ 94,219
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,543 $ 3,270
Accrued liabilities 6,101 4,058
Deferred revenue 2,611 3,377
Other current liabilities 226 418
-------- --------
Total current liabilities 13,481 11,123
-------- --------
Other non-current liabilities 360 683
-------- --------
Common stock, $0.001 par value - 50,000 shares
authorized; 19,540 and 19,126 shares issued
and outstanding, respectively 20 19
Paid-in capital 88,218 83,554
Foreign currency translation adjustment 40 54
Unrealized gain (loss) on investments 1 (59)
Retained earnings (accumulated deficit) 6,442 (1,155)
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Total stockholders' equity 94,721 82,413
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$108,562 $ 94,219
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues:
License and maintenance $18,473 $10,420 $49,278 $24,431
Installation and implementation 3,069 1,399 7,203 3,813
Contracts and other 1,671 2,784 6,202 8,814
------- ------- ------- -------
Total revenues 23,213 14,603 62,683 37,058
------- ------- ------- -------
Operating expenses:
License and maintenance 2,995 2,349 8,388 6,409
Installation and implementation 1,499 560 3,551 1,746
Contracts and other 1,111 1,860 4,415 5,869
Research and development 5,834 3,614 14,882 9,173
Sales and marketing 5,365 2,774 14,482 7,595
General and administrative 2,240 1,872 6,271 4,710
------- ------- ------- -------
Total operating expenses 19,044 13,029 51,989 35,502
------- ------- ------- -------
Operating income 4,169 1,574 10,694 1,556
Other income, net 523 371 1,365 1,203
------- ------- ------- -------
Income before income tax provision 4,692 1,945 12,059 2,759
Income tax provision 1,736 516 4,462 1,691
------- ------- ------- -------
Net income $ 2,956 $ 1,429 $ 7,597 $ 1,068
======= ======= ======= =======
Net income per share $ 0.14 $ 0.07 $ 0.37 $ 0.05
======= ======= ======= =======
Shares used in computing
net income per share 20,889 20,356 20,572 20,331
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,597 $ 1,068
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,302 2,178
Changes in assets and liabilities:
Accounts receivable, net (7,157) (5,521)
Other assets (837) (1,466)
Deferred income taxes -- 1,656
Accounts payable 1,273 2,365
Accrued liabilities 2,134 (364)
Deferred revenue (848) 1,451
Other liabilities (192) (365)
-------- --------
Net cash provided by operating activities 5,272 1,002
-------- --------
Cash flows from investing activities:
Purchases of investments (27,712) (21,437)
Maturities of investments 12,100 6,904
Proceeds from sale of investments 5,689 3,707
Acquisitions of property and equipment (6,157) (2,697)
-------- --------
Net cash used in investing activities (16,080) (13,523)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 3,446 1,874
Tax benefit from stock options 4,165 --
Proceeds under bank line of credit -- 309
Repayments under bank line of credit -- (2,504)
Proceeds from issuance of bank notes payable -- 1,999
Repayments of bank notes payable -- (1,999)
Repayment of notes payable to stockholders -- (1,000)
Repayment of debt from asset purchases -- (1,085)
Repayment of capital lease obligations (332) (419)
-------- --------
Net cash provided by (used in) financing activities 7,279 (2,825)
-------- --------
Effect of exchange rate changes on cash (14) --
-------- --------
Net decrease in cash and cash equivalents (3,543) (15,346)
Cash and cash equivalents at the beginning of the period 7,517 20,583
-------- --------
Cash and cash equivalents at the end of the period $ 3,974 $ 5,237
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
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Note I GENERAL
In management's opinion, the accompanying unaudited consolidated
financial statements for HNC Software Inc. (the "Company") for the three and
nine month periods ended September 30, 1997 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and include all adjustments (consisting only of normal recurring
accruals) that the Company considers necessary for a fair presentation of its
financial position, results of operations, and cash flows for such periods.
However, the accompanying financial statements do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All such financial statements are unaudited
except the December 31, 1996 balance sheet. This report and the accompanying
unaudited and audited financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto presented in its
Annual Report on Form 10-K/A-2 for the fiscal year ended December 31, 1996.
Footnotes which would substantially duplicate the disclosures in the Company's
audited financial statements for the fiscal year ended December 31, 1996
contained in the 1996 Annual Report have been omitted. The interim financial
information contained herein is not necessarily indicative of the results to be
expected for any other interim period or for the full fiscal year ending
December 31, 1997.
Note 2 BASIS OF PRESENTATION
The consolidated financial statements and related notes give retroactive
effect to the mergers on August 30, 1996 with Risk Data Corporation and on
November 29, 1996 with Retek Distribution Corporation, for all periods
presented, accounted for as poolings of interests.
Note 3 PENDING ACQUISITION
On July 15, 1997, the Company announced that on July 14, 1997 it had
signed a definitive agreement to acquire CompReview, Inc. ("CompReview").
CompReview develops and markets integrated payment system and medical bill
review software products and services that are used primarily by insurance
carriers, managed care companies, state funds, large corporate self insurers,
and third-party administrators ("TPA's") who pay or administer workers'
compensation and personal injury insurance claims. This transaction has not yet
been consummated and remains subject to the satisfaction of certain conditions,
including approval of the Company's stockholders and qualification of the
transaction for "pooling of interests" accounting treatment.
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Under the current terms of the pending transaction, the consideration payable by
the Company to acquire all CompReview's outstanding stock and stock options
would consist of a total of approximately 5,100,000 shares of the Company's
Common Stock and/or options therefor, with the mix of shares and options
currently expected to be approximately 4,900,000 shares and 200,000 options.
Assuming the Company's stockholders approve the proposed CompReview acquisition,
the actual number of shares and options to be issued in the transaction will be
determined at the closing date based on a formula that is dependent on the
amount of CompReview's retained earnings at month end prior to the closing date
and the average closing price per share of the Company's Common Stock for the 20
trading days ended immediately preceding the closing date of the transaction. A
special meeting of the Company's stockholders (the "Special Meeting") has been
called for November 25, 1997 to consider a proposal to approve the issuance of
shares and options in the proposed CompReview transaction and to increase the
number of shares of Common Stock reserved for issuance under the Company's 1995
Equity Incentive Plan by 750,000 shares. Further details regarding these matters
can be found in the Company's definitive proxy statement for the Special Meeting
filed with the Securities and Exchange Commission on October 22, 1997.
Note 4 NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("FAS128"), "Earnings Per
Share," which the Company will adopt as required for all periods ending after
December 15, 1997. Pursuant to this Statement, companies will replace the
reporting of "primary" earnings per share ("EPS") with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, not
including potential common stock. "Fully diluted" EPS will be replaced by
"diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under the
provisions of APB Opinion No. 15.
Pro forma earnings per share computed in accordance with FAS128 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
9/30/97 9/30/96 9/30/97 9/30/96
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<S> <C> <C> <C> <C>
Basic earnings per share $ 0.15 $ 0.08 $ 0.39 $ 0.06
Diluted earnings per share $ 0.14 $ 0.07 $ 0.37 $ 0.05
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("FAS130"), "Reporting Comprehensive
Income." The Company will adopt FAS130 as required for all periods beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income is defined as "the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources.
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It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Company is currently
evaluating the impact that the adoption of FAS130 will have on its financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("FAS131"), "Disclosures about
Segments of an Enterprise and Related Information." The Company will adopt
FAS131 as required for all periods beginning after December 15, 1997, commencing
with its annual financial statements for the year ended December 31, 1998. This
statement requires the disclosure of certain information about operating
segments in the financial statements. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
is currently evaluating the impact that the adoption of FAS131 will have on its
financial statements.
Note 5 RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
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HNC SOFTWARE INC.
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Item 2 contains certain forward-looking statements regarding the
Company, its business, liquidity, prospects and results of operations that are
subject to certain risks and uncertainties posed by many factors and events that
could cause the Company's actual business, liquidity, prospects and results of
operations to differ materially from those that may be anticipated by such
forward-looking statements. Factors that may affect such forward-looking
statements include, without limitation: the Company's ability to successfully
develop new products for both new markets and markets currently served by the
Company; the Company's ability to successfully market its products to
international customers; customer acceptance of new products; the Company's loss
of a large customer or key personnel; the Company's acquisition of (or failure
to acquire) other businesses; the Company's ability to manage growth and to
successfully integrate acquired businesses; the impact of competition (including
competition from customers' internal development staffs) on the Company's
revenues, market share or ability to maintain its premium usage-based pricing
terms and to generate recurring revenue from certain products; the availability
to the Company, at reasonable cost, of data required to operate or update its
intelligent decision software products; changes in law or regulatory
requirements that adversely affect or preclude customers from using the
Company's products for certain applications; the Company's inability to secure
rights to intellectual property or new government contracts for technology
development; delays in the Company's introduction of new products; and failure
by the Company to keep pace with emerging technologies. Accordingly, no
assurances can be given that events or results mentioned in any such
forward-looking statements will in fact occur.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions related to future events are
intended to identify forward-looking statements, but are not the exclusive means
of identifying forward-looking statements. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the
date of this report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
subsequently arise. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission.
The Company's quarterly revenues and operating results have varied
significantly in the past and may do so in the future. Although to date a
significant portion of the Company's revenues has come from monthly usage fees
under long-term
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contracts, there can be no assurance that the Company will continue to realize
such recurring revenues or that customers would not seek to cancel such
contracts if the Company's products did not remain competitive or did not
achieve effective results. A significant portion of the Company's business has
been derived from substantial orders placed by large organizations, and the
timing of such orders has caused material fluctuations in the Company's
operating results. In addition, because the Company provides certain of its
products to customers under perpetual licenses with no significant continuing
obligations for which collection of the related receivable is probable, it
recognizes the majority of its revenue under such perpetual licenses upon the
delivery of the software and acceptance by the customer. Thus, revenues derived
by the Company may be more likely to be recognized in irregular patterns that
may result in significant quarterly variations in the Company's revenues.
The Company's expense levels are based in part on its expectations
regarding future revenues and in the short term are fixed to a large extent.
Therefore, the Company may be unable to adjust its spending in a timely manner
to compensate for any unexpected revenue shortfall. As a result, if anticipated
revenues in any quarter do not occur or are delayed, the Company's operating
results for the quarter would be disproportionately affected. Operating results
also may fluctuate due to factors such as the demand for the Company's products,
product life cycles, the introduction and acceptance of new products and product
enhancements by the Company or its competitors, changes in the number of
products that are in new pilot product installations, changes in the mix of
distribution channels through which the Company's products are offered, changes
in the level of operating expenses, customer order deferrals in anticipation of
new products, competitive conditions in the industry and economic conditions
generally or in various industry segments.
The Company expects quarterly fluctuations in its operating results to
continue for the foreseeable future. Accordingly, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of the Company's future performance. No assurance can be given
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Revenues for the three months ended September 30, 1997 were
$23.2 million, an increase of 59% over revenues of $14.6 million for the same
period in the prior year. This increase was due primarily to greater license and
maintenance revenues, which were $18.5 million for the quarter ended September
30, 1997, an increase of 77% from $10.4 million for the comparable quarter in
1996. The Company's license and maintenance revenues are derived from periodic
recurring license fees,
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perpetual license fees and maintenance fees. This increase in license and
maintenance revenues was due primarily to the growth of license fee revenues the
Retek Merchandising System, which provides management solutions for retailers.
Other products contributing to the increase in license and maintenance revenues
were ProfitMax, which detects fraud in credit card applications, Capstone, which
processes credit card applications, and growth in revenue from Falcon license
fees.
Installation and implementation revenues for the quarter ended September
30, 1997 were $3.1 million, an increase of 119% as compared to installation and
implementation revenues of $1.4 million for the quarter ended September 30,
1996. This increase was primarily due to new installations of Capstone, which
processes credit card applications, and Colleague, which automates lending
decisions.
Contracts and other revenues for the three months ended September 30,
1997 were $1.7 million, a decrease of 40% as compared to $2.8 million for the
same period in the prior year. Contracts and other revenues are derived
primarily from development and consulting contracts with commercial customers
and research and development contracts with the United States Government. All
revenues for new product pilots (i.e., the first production installation of a
product) are also reported as contract and other revenues. The Company had fewer
new product pilot installations in process during the quarter ended September
30, 1997 than during the quarter ended September 30, 1996, which accounted in
part for the decrease in contracts and other revenues during that quarter.
Revenues from contract services are generally recognized as the services are
performed using the percentage of completion method based on costs incurred to
date compared to total estimated costs at completion.
During 1996, the Company had a significant number of new product
development projects in process consisting of new product pilot installations,
most of which the Company began shipping in production versions in 1997. Any
significant delay in the completion of these or other new products, or the
failure of such products, if and when installed, to achieve any significant
market acceptance, would have a material adverse effect upon the Company's
business.
LICENSE AND MAINTENANCE EXPENSES. License and maintenance expenses
primarily consist of the Company's expenses for personnel engaged in customer
support activities, costs of travel to customer sites and the costs of
documentation materials. License and maintenance expenses for the third quarter
of 1997 were $3.0 million and constituted 16% of license and maintenance
revenues for the quarter, whereas such expenses were $2.3 million and
represented 23% of license and maintenance revenues in the third quarter of
1996. The primary reason for the increase in these expenses in absolute dollars
was increased staffing and associated costs in client services to support the
increased volume of business. License and maintenance expenses thus represents a
significantly lower percentage of associated revenues in the quarter ended
September 30, 1997 than in the comparable period for the prior year. The
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resulting increase in gross margins was primarily due to increased shipments of
new and existing products, including the Retek Merchandising System, ProfitMax,
Capstone and Colleague, generating license and maintenance revenue that outpaced
associated costs. The Company's margins may vary from quarter to quarter
depending upon, among other things, the relative mix of early adopter priced
product revenues versus full priced product revenues for the quarter.
INSTALLATION AND IMPLEMENTATION EXPENSES. Installation and
implementation expenses for the third quarter of 1997 were $1.5 million and 49%
of installation and implementation revenues, whereas such expenses were $560,000
and 40% of installation and implementation revenues during the third quarter of
1996. The primary reason for the increase in these expenses in absolute dollars
was increased staffing and associated costs to support the increased volume of
business. Installation and implementation expenses as a percent of installation
and implementation revenues increased during the quarter ended September 30,
1997 as compared to the quarter ended September 30, 1996. The associated
decrease in gross margins was due in part to the fact that the Company had a
higher volume of early adopter transactions for the quarter ended September 30,
1997 as compared to the same period of the prior year. Early adopter
installations typically yield lower margins due to price discounts given to
early adopter customers of new products.
CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist
primarily of personnel-related expenses associated with the Company's
performance of such development, consulting, and research and development
contracts in this expense category. Contracts and other expenses in the third
quarter of 1997 were $1.1 million or 66% of contracts and other revenues as
compared to $1.9 million or 67% of such revenues in the third quarter of 1996.
The decrease in these expenses as a percent of contracts and other revenues is
due to the completion of several higher margin commercial development contracts
that were in process during the third quarter of 1996. The remaining development
contracts are primarily government contacts and on-going model development
projects, which typically yield lower margins than commercial new product pilot
contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the third quarter of 1997 were $5.8 million or 25% of total revenues compared to
$3.6 million or 25% of total revenues in the third quarter of the prior year.
The increase in these expenses in absolute dollars was due primarily to
increases in staffing and related costs to support increased product development
activities, primarily related to enhancements to Retek Merchandising, Retek Data
Warehouse, and Retek's ARI product and, to a lesser extent, Capstone and
CompCompare.
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SALES AND MARKETING EXPENSES. Sales and marketing expenses were $5.4
million or 23% of total revenues in the third quarter of 1997 compared to $2.8
million or 19% of total revenues in the third quarter of 1996. The increase in
sales and marketing expenses was due primarily to increased staffing related to
the Company's expansion of its direct sales and marketing staff, including
opening sales offices in Germany, South Africa and France, and increased
expenses for trade shows, advertising and other marketing programs to support
the roll-out of new products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2.2 million or 10% of total revenues in the third quarter of 1997,
compared to $1.9 million or 13% of total revenues in the prior year. Included in
general and administrative costs in the third quarter of 1996 were $544,000 of
acquisition costs. Excluding these acquisition costs, general and administrative
expenses in the third quarter of 1996 were $1.3 million or 9% of total revenues.
The increase in general and administrative costs was due to increased staffing
and related expenses, including recruiting costs, to support higher levels of
sales and development activity of the Company resulting in part from the fiscal
1996 acquisitions of Risk Data Corporation and Retek Distribution Corporation.
OPERATING INCOME. The above factors resulted in operating income of $4.2
million, constituting 18% of total revenues for the third quarter of 1997,
compared to operating income of $1.6 million or 11% of total revenues in the
same quarter of the prior year.
OTHER INCOME, NET. Other income for the third quarter of 1997 was
$523,000 compared to $371,000 in the third quarter of the prior year. The
increase was due to an increase in interest income during the third quarter of
1997 as a result of higher cash and investment balance, and a decrease in
interest expense of approximately $99,000 primarily related to the repayment of
Risk Data's bank notes payable during the third quarter of 1996.
INCOME BEFORE INCOME TAX PROVISION. The resulting income before income
tax provision for the third quarter of 1997 was $4.7 million or 20% of total
revenues, compared to income before tax provision of $1.9 million or 13% of
total revenues for the comparable quarter of 1996.
INCOME TAX PROVISION. The income tax provisions of $1.7 million and
$516,000 in the third quarters of 1997 and 1996, respectively, are based on
management's estimates of the effective tax rates to be incurred by the Company
during those respective full fiscal years. The income tax provision of $516,000
in the third quarter of 1996 is based on the income of the Company excluding
Risk Data and Retek, as they had unutilized
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net operating loss carryforwards at September 30, 1996 and as a result recorded
no tax provision.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Revenues for the nine months ended September 30, 1997 were
$62.7 million, an increase of 69% over revenues of $37.1 million for the same
period in the prior year. This increase was due primarily to greater license and
maintenance revenues, which were $49.3 million for the nine months ended
September 30, 1997, an increase of 102% from $24.4 million for the comparable
period in 1996. The Company's license and maintenance revenues are derived from
periodic license fees, perpetual license fees and maintenance fees. This
increase in license and maintenance revenues for this nine month period was due
primarily to the growth of license fee revenues from products of recently
acquired companies, including the Retek Merchandising System, which provides
management solutions for retailers, and PMAdvisor, which automates the
comparison of therapy treatments against clinical guidelines. Also contributing
to the increase in license and maintenance revenues was growth in revenue from
Falcon license fees, Capstone, which processes credit card applications,
ProfitMax, which manages credit card profitability and, to a lesser extent,
revenue from CompCompare, which permits insurers to compare historical costs of
workers' compensation insurance claims and Colleague, which automates lending
decisions.
Installation and implementation revenues for the nine months ended
September 30, 1997 were $7.2 million, an increase of 89% over revenues of $3.8
million during the first nine months of 1996. This increase was due primarily to
new installations of Capstone and Colleague, and to a lesser extent, ProfitMax.
Contracts and other revenues for the nine months ended September
30, 1997 were $6.2 million, a decrease of 30% as compared to $8.8 million for
the same period in the prior year. The Company had fewer new product pilot
installations in process during the nine months ended September 30, 1997 than
during the nine months ended September 30, 1996, which accounted in part for the
decrease in contracts and other revenues during that period.
During 1996, the Company had a significant number of new product
development projects in process consisting of new product pilot installations,
most of which the Company began shipping in production versions in 1997. Any
significant delay in the completion of these or other new products, or the
failure of such products, if and when installed, to achieve any significant
market acceptance, would have a material adverse effect upon the Company's
business.
LICENSE AND MAINTENANCE EXPENSES. License and maintenance expenses for
the first nine months of 1997 were $8.4 million, constituting 17% of license and
maintenance revenues for the period, whereas such expenses were $6.4 million,
representing 26% of
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license and maintenance revenues in the first nine months of 1996. The primary
reason for the increase in these expenses in absolute dollars was increased
staffing and associated costs in client services to support the increased volume
of business. License and maintenance expenses represented a lower percentage of
license and maintenance revenues in the period ended September 30, 1997 than in
the comparable period in the prior year. This increase in gross margins was due
to increased shipments of new products, including the Retek Merchandising
System, PMAdvisor, Capstone, Colleague and ProfitMax, which generated license
and maintenance revenues that outpaced the growth in associated costs.
INSTALLATION AND IMPLEMENTATION EXPENSES. Installation and
implementation expenses for the first nine months of 1997 were $3.6 million or
49% of installation and implementation revenues, whereas such expenses were $1.7
million or 46% of installation and implementation revenues during the same
period of 1996. The primary reason for the increase in these expenses in
absolute dollars was increased staffing and associated costs to support the
increased volume of business. The decrease in gross margins for installation and
implementation activities was due in part to the fact that the Company had a
higher volume of early adopter transactions for the nine months ended September
30, 1997 as compared to the same period of the prior year. Early adopter
installations typically yield lower margins due to price discounts given to
early adopter customers of new products.
CONTRACTS AND OTHER EXPENSES. Contracts and other expenses in the first
nine months of 1997 were $4.4 million or 71% of contracts and other revenues as
compared to $5.9 million or 67% of such revenues in the first nine months of
1996. The increase in these expenses as a percent of revenues is due to the
completion of several higher margin commercial development contracts during the
second quarter of 1997. The remaining development contracts are primarily
government contacts and on-going model development projects which typically
yield lower margins than commercial new product pilot contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the first nine months of 1997 were $14.9 million or 24% of total revenues
compared to $9.2 million or 25% of total revenues in the first nine months of
the prior year. The increase in these expenses in absolute dollars was due
primarily to increases in staffing and related costs to support increased
product development activities, primarily related to enhancements to Retek
Merchandising, Retek Data Warehouse, and Retek's ARI product, and to a lesser
extent, CompCompare, ProviderCompare, and Capstone.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $14.5
million or 23% of total revenues in the first nine months of 1997 compared to
$7.6 million or 20% of total revenues in the first nine months of 1996. The
increase in sales and
15
<PAGE> 16
marketing expenses was due primarily to increased staffing related to the
Company's expansion of its direct sales and marketing staff, including opening
sales offices in the United Kingdom, Japan, South Africa, Germany, and France,
and increased expenses for trade shows, advertising and other marketing programs
to support the roll-out of new products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $6.3 million or 10% of total revenues in the first nine months of 1997,
compared to $4.7 million or 13% of total revenues in the prior year. Included in
general and administrative costs in the first nine months of 1996 were $643,000
of acquisition costs. Excluding these acquisition costs, general and
administrative expenses in the first nine months of 1996 were $4.1 million or
11% of total revenues. The increase in these costs was due to increased staffing
and related expenses, including recruiting costs, to support higher levels of
sales and development activity of the Company resulting in part from the fiscal
1996 acquisitions of Risk Data Corporation and Retek Distribution Corporation.
The decrease in general and administrative expenses as a percent of total
revenues is due to relatively higher increases in revenues as compared to the
increase in general and administrative expenses.
OPERATING INCOME. The above factors resulted in operating income of
$10.7 million, constituting 17% of total revenues for the first nine months of
1997, compared to $1.6 million , constituting 4% of total revenues in the same
period of the prior year.
OTHER INCOME, NET. Other income for the first nine months of 1997 was
$1.4 million compared to $1.2 million in the first nine months of the prior
year. The increase was due to a decrease in interest expense of approximately
$293,000 primarily related to the repayment of Risk Data's bank notes payable
during the third quarter of 1996.
INCOME BEFORE INCOME TAX PROVISION. The resulting income before income
tax provision for the first nine months of 1997 was $12.1 million or 19% of
total revenues, compared to income before tax provision of $2.8 million or 7% of
total revenues for the comparable period of 1996.
INCOME TAX PROVISION. The income tax provisions of $4.5 million and $1.7
million in the first nine months of 1997 and 1996, respectively, are based on
management's estimates of the effective tax rates to be incurred by the Company
during those respective full fiscal years. The income before income tax
provision of $2.8 million for the first nine months of 1996 includes losses
incurred by Risk Data
16
<PAGE> 17
Corporation and Retek Distribution Corporation for which no tax benefit was
available during that period, resulting in a higher than normal effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first nine months
of 1997 was $5.3 million, which represented net income before depreciation and
amortization of approximately $10.9 million, further increased by increases in
accrued liabilities of $2.1 million and accounts payable of $1.3 million and
offset by increases in accounts receivable of $7.2 million and other assets of
$837,000, and decreases in deferred revenue of $848,000, related to contract and
license prepayments, and other liabilities of $192,000. Net cash provided by
operating activities during the first nine months of 1996 of $1.0 million
represented net income before depreciation and amortization of approximately
$3.2 million. This was increased by increases in accounts payable of $2.4
million and deferred revenue of $1.5 million related to contract and license
prepayments and, and a decrease in deferred tax assets of $1.7 million offset by
increases in accounts receivable of $5.5 million and other assets of $1.5
million.
Net cash used in investing activities was $16.1 million during the first
nine months of 1997, primarily due to net purchases of investments of $9.9
million. In addition, the Company expended $6.2 million for property and
equipment during the first nine months of 1997, including $3.8 million for
computer equipment to support the increased staffing across the Company and $1.8
million for furniture and fixtures primarily related to the relocation of
Retek's Minneapolis headquarters. Net cash used in investing activities was
$13.5 million during the first nine months of 1996 as a result of net purchases
of investments of $10.8 million. The Company also acquired approximately $2.7
million of property and equipment (primarily computer equipment) during the
first nine months of 1996.
Net cash provided by financing activities was $7.3 million during the
first nine months of 1997 primarily due to the tax benefit from stock option
exercises of $4.2 million and the net proceeds from the issuance of common
stock of $3.4 million, offset by capital lease repayments of $332,000 million.
Net cash used in financing activities was $2.8 million during the first nine
months of 1996, primarily as a result of repayments of the revolving line of
credit, notes payable to stockholders and capital lease obligations totaling
$7.0 million offset by proceeds from Risk Data Corporation's bridge loan and
bank line of credit totaling $2.3 million and the net proceeds from the
issuance of common stock of $1.9 million.
At September 30, 1997, the Company had $40.6 million in cash, cash
equivalents and investments. Management believes that the Company's cash and
investments and cash generated from operations will be adequate for the
Company's cash requirements for the next twelve months. Management intends to
invest the Company's cash in excess of current operating requirements in
interest-bearing, investment grade securities with maturities of two years or
less. A portion of the Company's cash could be
17
<PAGE> 18
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies or data. From time to time, in the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products, technologies or data.
18
<PAGE> 19
Item 5: OTHER INFORMATION
See Note 3 to Notes to Consolidated Financial Statements (unaudited)
contained herein regarding the proposed transaction with CompReview, Inc. and
the special meeting of the Company's stockholders scheduled for November 25,
1997 to approve the issuance of shares of the Company's Common Stock and options
for Common Stock in that transaction and a proposal to increase the number of
shares of the Company's Common Stock reserved for issuance under the Company's
1995 Equity Incentive Plan by 750,000 shares.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.01 Agreement and Plan of Reorganization dated July 14, 1997
among the Company, CompReview, Inc., the stockholders of
CompReview, Inc. and FW1 Acquisition Corp., a wholly-owned
subsidiary of the Company. (1)
11.01 Statement Regarding Computation of Per Share Earnings
27.01 Financial Data Schedule
--------------------
(1) Incorporated by reference from the Company's definitive proxy
statement for its special stockholders meeting to be held on
November 25, 1997, filed with the Securities and Exchange
Commission on October 22, 1997.
(b) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
HNC SOFTWARE INC.
Date: November 14, 1997 By: /s/ Raymond V. Thomas
---------------------
Raymond V. Thomas
Vice President, Finance & Administration
and Chief Financial Officer
(for Registrant as duly authorized officer
and as Principal Financial Officer and
Principal Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
The following exhibits are filed with this Report:
Exhibit 2.01 Agreement and Plan of Reorganization dated July 14,
1997 among the Company, CompReview, Inc., the
stockholders of CompReview, Inc. and FW1 Acquisition
Corp., a wholly-owned subsidiary of the Company (1)
Exhibit 11.01 Statement Regarding Computation of Per Share Earnings
Exhibit 27.01 Financial Data Schedule
- -----------------------------
(1) Incorporated by reference from the Company's definitive proxy statement
for its special stockholders' meeting to be held on November 25, 1997.
21
<PAGE> 1
EXHIBIT 11.01
HNC SOFTWARE INC.
STATEMENT REGARDING
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------------- ------------------ ------------------- ------------------
FULLY FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $ 2,956 $ 2,956 $ 1,429 $ 1,429 $ 7,597 $ 7,597 $ 1,068 $ 1,068
======= ======= ======= ======= ======= ======= ======= =======
SHARES (1)
Weighted average common
shares outstanding 19,473 19,473 18,845 18,845 19,328 19,328 18,551 18,551
Weighted average common
stock options and
warrants as determined by
application of the
treasury stock method 1,416 1,503 1,511 1,650 1,244 1,548 1,780 1,857
------- ------- ------- ------- ------- ------- ------- -------
Weighted average common and
common equivalent shares outstanding 20,889 20,976 20,356 20,495 20,572 20,876 20,331 20,408
======= ======= ======= ======= ======= ======= ======= =======
NET INCOME PER SHARE OF COMMON STOCK $ 0.14 $ 0.14 $ 0.07 $ 0.07 $ 0.37 $ 0.36 $ 0.05 $ 0.05
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) All share and per share amounts have been adjusted to give retroactive
effect to the stock split effected as a stock dividend, which occurred on
April 3, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,974
<SECURITIES> 18,430
<RECEIVABLES> 27,728
<ALLOWANCES> (1,739)
<INVENTORY> 264
<CURRENT-ASSETS> 3,302
<PP&E> 16,618
<DEPRECIATION> (6,954)
<TOTAL-ASSETS> 108,562
<CURRENT-LIABILITIES> 13,481
<BONDS> 0
20
0
<COMMON> 0
<OTHER-SE> 88,259
<TOTAL-LIABILITY-AND-EQUITY> 108,562
<SALES> 62,683
<TOTAL-REVENUES> 62,683
<CGS> 16,354
<TOTAL-COSTS> 16,354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 12,059
<INCOME-TAX> 4,462
<INCOME-CONTINUING> 7,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,597
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
